Careview Communications Is A Terminal Short

Careview Communications (OTCQB:CRVW) presents a compelling and timely short opportunity. I think you will be shocked that this company is still in existence. CRVW sells cable-based video monitoring systems to hospitals and has been doing so for 5+ years. During those 5 years, it has made numerous new 'contract' announcements, yet has barely generated $1M in aggregate revenue, has never recorded a positive gross margin and has consumed over $25M in cash. With a market cap of $145M and EV of $147M, CRVW trades at an absurd 116x EV/ revenue. Continuous promotion and capital raises tied to new business has enabled the company to subsist. However, zero new contracts have been announced since last November and adoption within existing customers has not materialized. Given its liquidity and rate of cash burn, CRVW and its shady management team's demise seems imminent.

Background

CEO Samuel A. Greco formerly served as CFO of Columbia/HCA Healthcare Corporation. In 1998, Columbia/HCA sued Greco for engaging in a racketeering scheme that included fraudulent contracts and the channeling of funds to entities he controlled. The Greco Affair, as it became known, expanded and eventually led to Columbia pleading guilty in one of the largest healthcare fraud settlements in US history ($840M in penalties). CRVW President Steve Johnson and former CFO John Bailey worked together with similar titles at Heartland Wireless. Under their leadership, Heartland Wireless was investigated by regulators as a potential scam and filed for bankruptcy in late 1998. In November 2011, Bailey resigned without prior notice, and remains on the payroll at $120k per year for "consulting purposes."

In early 2011, the Company was near insolvency, with only $12k in cash. Shortly thereafter, however, CRVW announced it had signed an agreement with HMA. While no specific pricing details or timing information was provided, it enabled CRVW to raise $20M through a convert (12% PIK with warrants) from HealthCor Partners and stave off bankruptcy. HealthCor put another $5M into CRVW in January 2012.

Product

CRVW's in-room video monitoring systems (CareView) is essentially just a cable-based motion sensor. The product is primarily meant to be used to prevent bed falls among geriatric hospital patients. Management cites a massive addressable market of $16-19B that includes all costs associated with falls. This is misleading, because CRVW's systems only seek to prevent bed falls. According to nurses interviewed, there are a number of existing solutions to prevent bed falls, including retractable side bars, waist restraints and sensors that are less expensive, more durable and easier to manage than CRVW's product. In fact, the main concern of these nurses was not patients falling out of bed, but falling in the bathroom or elsewhere when walking. Unit pricing for a CRVW Virtual Bed Rail are $750-800 each per year versus $80-120 for a fixed bed bar.

Even if it were a viable product, CRVW has only spent $2.6M in R&D over the last five years, enabling pretty much any potential competitor to enter the market. Existing competitors include LodgeNetRX (MDM Commercial Healthcare), SkyLight (Skylight Healthcare Systems), eICU (Royal Philips Electronics) and Stryker Video Network Hub. All have significantly more resources and strong ties to purchasing agents at hospitals and care facilities nationally.

The economics of the business are very unappealing. The direct cost of operating its existing network was over twice what it received in revenue; this resulted in an LTM gross profit of -$1.7M. The financial picture gets worse, as SG&A is largely variable and over 5x revenue. Factoring in $9M in capex and $1M in cash obligations, CRVW is burning $20M a year. This does not even include the Company's planned hiring of additional salespeople. CRVW can only tap its $20M revolver for use on new agreements. As noted, the Company has not announced a new customer since November 2011, so this credit line not presently available. With only $8M in cash on the balance sheet and only highly dilutive capital alternatives, CRVW's circumstances are dire.

Customers Agreements & Valuation

Service agreements do not have usage guarantees and can be cancelled by the customer on 30 days' notice. Company news releases characterize these agreements as long-term contracts and cite total beds of customers, when the product is only relevant to specific rooms (principally pediatric and geriatric). Current agreements cover an aggregate of 12,850 beds, of which 5,068 are deployed. The Company's largest customer (66% of revenue), HMA, represents 9,500 beds, of which 4,345 were deployed. Based on the existing agreements on December 31, 2011, management expected to be able to bill $3.9M in 2012 (per 10-K backlog). This assumes full adoption among existing agreements. No new customers have been added since November 2011. In the first half of 2012, CRVW has only recorded $830k in revenue, so clearly these estimates are off-base. Even if the Company were able to have a huge second half, $3.9M is still 38x EV/ revenue. Taking it a step further, the backlog of estimated revenue over the next 6 years is $12.8M in aggregate or 11.5x EV/ revenue.

Like PHMD in our June note, CRVW is Nevada-incorporated and went public through the backdoor with a reverse merger. The Company continues to avoid SEC scrutiny by listing itself on the OTC. Apparently it has avoided investor scrutiny as well. At 9x book value (with no real estate holdings and very limited IP) and no sign of declining cash burn, CRVW's stock should be a zero.

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